As defined under the “Section 6 of the ITAA 1997” an individual that derives income through the private exertion is regarded as the income consisting of the earnings, salaries, wages, bonus, fees, pension, superannuation’s or any form of business profits that is performed by the taxpayer either individually or through the partnership (Woellner et al. 2016). Referring the definition of “Section 6-5 of the ITAA 1997” income that is generated from the ordinary sources is held liable for taxation. Citing the reference of the court in the case of “Scott v Commissioner of Taxation (1935)” receipts will be held as the taxable income in compliance with the ordinary concepts (Barkoczy 2016). Denoting from the current circumstances of Manic Pty Ltd the sum of $80,000 that are received from the service fees forms the part of the taxable income as income derived from private exertion with reference to “section 6 of the ITAA 1936”.
As stated under the “section 6-5 of the ITAA 1997” a person when beneficially derives the income has the character of home coming for the taxpayer (Cao et al. 2015). Additionally, income that are derived from the ordinary concept of mankind is considered assessable. Evidently in the situation of Manic Pty Ltd the interest income will be included at the time of filing for tax return.
According to the “section 8-1 of the ITAA 1997” an individual taxpayer is allowed to claim deductions for the expenses that are incurred in generating the assessable income for any loss or expenses incurred (Braithwaite 2017). The Australian taxation office provides that expenditure related to trading stock is allowed for deduction. An increase in the value of the trading stock constitute assessable income whereas a fall in the value of trading stock is regarded as the permissible deduction. Taking into the consideration the value of trading stock helps in assuring that in the ordinary business course the taxpayer relating to trading stock purchased during the year reflects the cost of sales that is involved during the year. Therefore, purchasing the trading stock from the Hong Kong forms the part of the deduction as the accounting expenditure.
According to the “taxation ruling of 92/18” provides that there are situations where a taxpayer can claim an allowable deductions relating to the bad debts (Davis et al. 2015). According to the “section 51 (1)” any types of business losses that are in the nature of outgoing or holding the characteristics of revenue is allowed for deductions when those losses and outgoings are primarily incurred. The federal court in the case of “Crane Sales Ltd v Federal Commissioner of Taxation (1971)” explained that the debt constitutes the purpose in section “63 of the ITAA 1997” where a taxpayer is allowed to claim equal deductions for the debt which is bad.
An individual taxpayer is only allowed to claim deductions for the bad debt which is entirely written off as the bad debt during the year of income (Saad 2014). Ideally in the case of Manic Pty Ltd the bad provision shall not be allowed as allowable deductions. The reason for this is that the company did not recorded or suffered any form loss from bad debt. Furthermore, there was no evidence of recording of transaction by the Manic Pty Ltd in the income year where an appropriate bad debt deduction can be claimed.
The guidelines provided by the Australian taxation office provides that a person can claim deductions relating to expenses that are in the nature of capital (Miller and Oats 2016). These deductions are only made available if the expenses are not occurred as the charge of depreciating assets. An individual that occurs the expenses relating to the present business management or business which was previously executed or aspires to conduct, the expenditure will be allowed for deduction to the extent the taxpayer aspires to carry on the business (Robin and Barkoczy 2018). The Australian Taxation Office provides that a deduction is allowable relating to the cost of feasibility studies, market research or setting up the business. The expenses of $25,000 incurred by the Manic Pty Ltd associated to the viability of the entering to the new market will be allowed for claiming deductions.
According to the “Section 25-10 of the ITAA 1997” a person is allowed to claim to deductions for expenses relating to repairs that are performed on the premises or on the depreciating assets which is held or completely used for the producing assessable income (Robin 2017). Repairs constitutes restoring the asset to the earlier state without causing any change in the asset character. “Section 25-10 of the ITAA 1997” defines that expenses which is occurred for the purpose of repair are not allowed for deductions given the expenses are in the nature of capital.
The federal court in the case of “Sun Newspaper Ltd v Federal Commissioner of Taxation (1938)” differentiated between the capital and revenue outgoings. The commissioner explained that expenses are incurred in producing the taxable income or replacing the structure or the operating expenses is not allowed for deductions (Blakelock and King 2017). A person is allowed to claim deductions only in the instances when the objective of making deterioration good that is occurred through wear and tear. This usually comprises of renewing or replacing the subsidiary portion but not completely the asset. Hence, the expenses that are occurred in replacing the metal roof with the tiles is regarded as the capital expenditure and as a result of this Manic Pty Ltd would not be allowed to claim an allowable deduction under “subsection 25-10 (3) of the ITAA 1997”.
A person is entitled to claim an allowable deduction relating to the interest that is paid on the borrowed amount to purchase the shares and investment related items. The expenditure that are generally incurred are in the course of deriving taxable income (Fry 2017). As evident Manic incurred an expenditure on loan interest for the purchase of new factory and the same will be considered as allowable deduction section 8-1 of the ITAA 1997. The expenses carries sufficient association with the positive limbs and the same is allowed in case of Manic.
As evident Manic reported a profit from the sale of factory and also derived a profits upon the sale of shares. The income will be included in the taxable earnings of “section 6-5 of the ITAA 1997”. Profits generated from the business is held as income based on the realisable value (Murphy and Higgins 2016). To carry the characteristics of income the item must be account as gain for the taxpayer that is beneficially obtained. Evidently in the situations of sale of factory and sale of shares the amount derived from such transactions represents gain for Manic Pty Ltd. As a consequence of this it would be held for assessment at time of determining assessable income.
According to the Australian taxation office an individual experiencing loss upon the sale investment items namely the shares and then the losses would constitute a capital loss and the same is allowed to be set off only against the capital gains (Schenk 2017). Similarly in case of Manic a capital loss was bought forward that comprised of $35,000. Manic in this respect can set off the loss from the sale of shares.
According to the “Section 40-25 (1) of the ITAA 1997” a business entitled to claim for deduction relating to the sum which is equal to the falling value during the income year of the depreciating asset held by the entity (Hoffman et al. 2014). A depreciating asset refers to those asset that has the restricted life and is expected to fall in value over the time period. As evident Manic incurred a depreciation expenditure of $120,000. By adhering to “section 40-25 (1) of the ITAA 1997” Manic is entitled to claim for the allowable deduction.
According to the Australian taxation office expenditure that is incurred in as the business entertainment purpose is allowed for deductions. These business expense constitute for work purpose and are allowed for deduction under the provision of “section 8-1 of the ITAA 1997” (Hill and Mancino 2014). According to “division 8 or section 40-880 of the ITAA 1997” payments relating to compensation is allowed for deductions. An explanation has been laid under the “section 25-50 of the ITAA 1997” and “subdivision 3AA of the ITAA 1936” where a business is allowed to claim for deduction relating to specific payments.
Expenses that are occurred once and for all is usually regarded as the capital expenses whereas expenses incurred often or regularly is held as revenue expenses. An expenses that has the lasting benefit in bringing the asset into the existence is regarded as the capital expenses. Referring to “division 8 of the ITAA 1997” capital expenses are not allowed for deduction (Pope, Rupert and Anderson 2017). As held in “Sun Newspaper v Federal Commissioner of Taxation” payments for restrictive covenants is not allowed for deductions since the sum constitute capital in nature. Referring to the court of law verdict Manic incurred an expenses on restrictive covenants and the expense constitute capital expenses which is not allowed for deductions.
The notion of tax compliance is regarded as the challenging task for the tax practitioner. The reason for rise in problem is due to the purpose of tax practitioner profession and the anticipation of the society and other organizations that refute from each other. The purpose of tax practitioner is to make sure that the clients are payment the required sum of tax. These payments would not held be taxable for the clients (Murphy and Higgins 2016). However, the tax practitioner is required to assure that they use the loopholes that are existing the law for the client’s advantage. Simultaneously, adopting such kind of practices requires huge amount of funds which can be employed for the benefit of the society.
In the modern age, avoiding tax has turn out to be the most argued topics as publics are reliant on the government expenses for overall growth of the nation. The systematic tax avoidance act as the major threat for the government when measures are taken by the government reduce the gap of economic inequalities (Hoffman et al. 2014). Taxes are usually applied on the profits that are derived by the organizations however in the current age the profits can be adjusted against several non-cash and non-real expenses.
The accountants use the loopholes and facilitates the client companies to lower the burden of taxation. The accounts are required to preserve the ethical factors of their profession and disregard the unethical practices which may hamper the growth of the society at large (Hill and Mancino 2014). The accounts are required to assure that the tax advantage that are accrued in the direction of company are authentic and valid.
The accusation that business and large corporate firms uses the loopholes that are present in the law to avoid the tax is regarded as correct thing but the simultaneously it is held as inconclusive. Alternatively, the companies cannot be held at fault as there are numerous loopholes in the provisions that is created by state. The objective of the company is increase the return for its shareholders. On noticing that big business firms are able to lower the burden of taxation the companies would continue their operations without being hindered (Pope, Rupert and Anderson 2017). With that being said large corporate firms are required to return the society and should use the correct resources. Else the society would take away the powers that is granted to the corporate firms.
Conclusion:
On a conclusive note, to address the government issues, the accountants and the corporations are required to discharge their duties collectively. The government is required to make sure that there is no form of loophole in the tax provision as any loopholes can be exploited for personal benefit. The accounts are required to follow the ethical practices at the time of executing their duties and the organizations are required to refrain from undertaking any form of unwarranted benefits of the available resources which is granted by the shareholders with the objective of creating value for them and for the society as well.
Reference List:
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.
Davis, A.K., Guenther, D.A., Krull, L.K. and Williams, B.M., 2015. Do socially responsible firms pay more taxes?. The accounting review, 91(1), pp.47-68.
Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office. The APPEA Journal, 57(1), pp.49-63.
Hill, F.R. and Mancino, D.M., 2014. Taxation of exempt organizations.
Hoffman, W.H., Raabe, W.A., Maloney, D.M., Young, J.C. and Smith, J.E., 2014. South-Western Federal Taxation 2015: Corporations, Partnerships, Estates and Trusts. Nelson Education.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage Learning.
Pope, T.R., Rupert, T.J. and Anderson, K.E., 2017. Pearson’s Federal Taxation 2018 Corporations, Partnerships, Estates & Trusts. Pearson.
Robin and Barkoczy woellner (stephen & murphy, shirley et al.), 2018. Australian taxation law 2018. OXFORD University Press.
Robin, H., 2017. Australian taxation law 2017. Oxford University Press.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Schenk, D.H., 2017. Federal Taxation of S Corporations. Law Journal Press.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue
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